Why One SEC Commissioner Spoiled The Fed And Treasury's Plan For Money Market Capital Controls: In His Words

Tyler Durden's picture

Beginning in January of 2010, and continuing into July of this year, we explained how one of the most insidious attempts at capital controls undertaken by the authorities, namely to replace the $1.00 NAV method that money markets have employed since inception, forcing money markets to imposed capital buffers, and most importantly, to enact mandatory gating if and when the time comes for investors to withdraw their money when they so desired, was taking shape. In other words, to institute capital controls when it comes to money market funds. We already explained that the idea to kill money markets is not new, and originated at the Group of 30 many years ago (its members explain its interests vividly enough) , as an attempt to have investors voluntarily shift their capital allocation out of a liquid but very much inert from the fractional reserve banking system $2.7 trillion market into other liquid, but fractional banking levered markets such as stocks and bonds. In essence, this would generate an up to $2.7 trillion incremental demand as those invested in money markets would find it more "appealing" to keep their cash equivalents in the "security" of 150x P/E stocks like Amazon, or in the worst case, Treasury Bills. After all faced with the option of being "gated" or investing their money in other "non capital controlled" markets, one would be an idiot to pick the former. This is precisely what Mary Schapiro hoped would be the case when she put the vote to the SEC, only to find that she couldn't even get a majority to support her own proposal (which as a reminder was supported by two Fed presidents: uber doves Eric Rosengren of Boston and William Dudley of New York, and Treasury Secretary Timothy Geithner) in her own co-opted house. It is also the reason one person decided to vote against Schapiro's proposal - Luis Aguilar. His explanation why he voted against money market fund capital controls is attached.

Statement Regarding Money Market Funds
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
Washington, D.C.
August 23, 2012


Having reviewed the Chairman’s proposal on money market funds, it is clear to me that there is much to be investigated related to the cash management industry, as a whole, before a fruitful discussion can be initiated as to whether additional structural changes should be made to only one segment of the cash management industry — SEC-registered money market funds.


The cash management industry is a large industry that includes many pooled vehicles exempted from registration and largely excluded from regulatory oversight. There are larger macro questions and concerns about the cash management industry as a whole that must be considered before a specific slice of that industry — money market funds — is fundamentally altered. To move forward without this foundation is to risk serious and damaging consequences in contravention of the Commission’s mission.


I am, and continue to be, supportive of the Commission putting forward a thoughtful and deliberative concept release that asks serious and probing questions about the cash management industry as a whole to diagnose its frailties and assess where reforms are required. This release should include all pooled cash management mechanisms so that the Commission is knowledgeable about how trillions of dollars are managed and understands how this money is able to move from the regulated, transparent money market fund market to the opaque, unregulated markets.


One section of this release would have to be devoted to a study of the Commission’s 2010 money market amendments (“2010 Amendments”) to gather data and ascertain their effectiveness. Money market fund investors have said that they appreciate the greatly enhanced transparency after the Commission’s 2010 Amendments and have put it to great use. To date, neither the Commission nor the staff has undertaken a thorough and comprehensive study of the 2010 Amendments. A critical analysis of the efficacy of the 2010 Amendments would be a necessity to analyze what, if any, additional steps are required. This critical analysis must precede any proposals to further amend our rules, and in this instance, it is particularly necessary that this study inform any proposal, not merely accompany it.


I remain concerned that the Chairman’s proposal will be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the dark, opaque, unregulated market. Currently, in addition to all the prescriptive conditions applicable to SEC-registered money market funds, these funds are also highly transparent to investors and regulators in a way that other cash management vehicles are not. Many large investors in SEC-registered money market funds have made this point, and they have emphasized that the mere publication of this SEC proposal would be the trigger for the movement of monies. Such transfers could cause significant damage to the country’s short-term capital markets.


While such concerns are often expressed in connection with any regulatory action and can veer into hyperbole, this is different. Here, investors are speaking out about their own investments. It is their money that is invested in money market funds, and they can easily direct these monies to other investments.


I am also concerned that, given the current volatility of the capital markets and the fragile state of the economy, the timing of this proposal and its collateral consequences could be needlessly harmful.


Thus, a concept release to study the cash management industry as a whole would provide a foundation to understand the role, and relative size, of SEC-registered money market funds in that overall industry. The information gathered in response to the concept release would provide the foundation to support any proposed changes to the entire cash management industry.


Unfortunately, the lack of a foundation for and the rush to act on the proposal are also illustrated in the letters the Commission has received within the last week questioning the accuracy, veracity, and credibility of an SEC staff list of 300 money market funds that received sponsor support. The Commission was never given the chance to assess the staff’s underlying methodology to understand how the list was compiled. Now, the Commission is receiving letters stating that there are serious discrepancies with the list. This list has been touted publically as a prime example of why additional reform is needed. Now, the credibility of that list is in doubt. It is impossible to understand what is true, and this demands more time to sort out the facts.


There is a way forward to tackle the issues that matter to investors and the public interest. I remain supportive of an effort that analyzes the cash management industry as a whole and the effects of the 2010 Amendments. These findings should inform further actions. As an SEC Commissioner, it is important to me that all of the Commission’s actions are predicated on a solid foundation of credible information, and this is no different. At a time when there are still outstanding issues regarding Dodd-Frank rulemaking, market structure, broker-dealer custody, and other matters of imminent concern to investors, I am ready to act to do what is in the best interests of investors and the public interest.



End result: having been made a mockery in her own house, Mary Shapiro, as useless and as much as puppet of bigger interests, as ever, is now forced to turn to whom to push for the Group of 30's plan to kill Money Market Funds? Why the US Treasury and the Fed of course. And everyone knows just whose interests these two institutions have at heart.

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fonzannoon's picture

this is basically the obamacare of investing

Buckaroo Banzai's picture

The Makers vs. the Takers in "Your cash is trash!"

vast-dom's picture

Luis Aguilar is really part of the pron cracked out SEC? Well not for long. This is outfuckingrageous! just fucking wipe out the SEC, FED and the GOV in general! I swear it's fucking time to FIGHT TPTB!

Pladizow's picture

To bad it didnt come to fruition!

Smart money moved to PM's.

Dunb money to FDIC bank deposits and through the magic of fractional reserve banking, PM's soar!

vast-dom's picture

WASHINGTON (MarketWatch) -- Republican presidential candidate Mitt Romney pushed back on an interview given by one of his advisers earlier in the week that suggested he would be willing to renominate Federal Reserve Chairman Ben Bernanke. Speaking to Fox Business Network, Romney said: "I always listen to people who have counsel and advice but my view has been that I would want to select someone who is a new member, excuse me, a new person to that chairman position, someone who shared my economic views, was sympathetic to the needs of our nation and I want to make sure the Federal Reserve focuses on maintaining the monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down to their peril." While Romney says he hasn't considered a single person, he added that Glenn Hubbard, who had given that interview earlier in the week, is "a wonderful economic adviser," and that Greg Mankiw is "likewise an excellent economic adviser." 

New Fed asshole same as old Fed asshole and net result same: raping of Muppetsvile USA

slewie the pi-rat's picture

listen dick-nose!

the last fuking thing zH needs at this point is trolls like you putting up mittens' stale 2-day-old press releases with a buncha fuking buzzwords and anti goobermint wing-nut  bullshit while pretending it's just awful!

there is fuking GOP/romney string RIGHT below this one ya know!

ya fuking repulicunt jerk-off asswipe!

LMAOLORI's picture



How dumb?



Per the Q4 2011 FDIC Chief Financial Officer's report to the Board, published on March 30, 2012, the FDIC's Deposit Insurance Fund had a balance of $11.8 billion dollars.


Bank deposits in the United States at the same time are estimated to be between $8 TRILLION and $10 TRILLION. Let's be conservative and say the number is $8TTT.

11,800,000,000 divided by 8,000,000,000,000 equals 0.001475, which I will round UP to 0.0015.

That is read as "fifteen hundredths of one percent". It isn't one percent, it is fifteen hundredths of one percent. That is how much the FDIC is carrying to back all of those little signs on the teller windows that say "Each Depositor insured to at least $250,000. Backed by the full faith and credit of the United States government."

But hey! It could be worse! Back in 2009 the FDIC was completely insolvent - IN THE HOLE. So what they did was to force all of the banks to pay three years worth of premiums upfront in one year, in order to replenish the fund.



Talk about CAPTURED 

Money Funds Step Up Fight --- Fidelity and Others Have Dedicated More Lobbyists to Beating Back SEC Rules


Mr. Aguilar, a former general counsel for Invesco Inc., the 13th largest money-fund company by assets, has said he doesn't believe there is sufficient evidence that additional reforms are needed. A spokeswoman for Mr. Menendez declined to comment. Mr. Aguilar declined to comment.

This is a very good article

A Case Study in Wall Street Getting Its Way in Washington


Every once in a while the financial industry lives up to its critics’ worst expectations: that it operates against the interest of the investing public, in cahoots with captive regulators andWashington’s powerful elite.

This is exactly what happened Wednesday, when Securities and Exchange Commission Chairman Mary Schapiro had to cancel an Aug. 29 vote on sensible new rules to make money-market mutual funds safer. Although Schapiro had the support of Federal Reserve ChairmanBen S. Bernanke and leading conservative economists, she knew that three of the five commissioners would oppose her. This came after an intensive and often-misleading campaign by the $2.6 trillion money-fund industry to gloss over the inherent instability of the funds.

Among those swayed by the lobbying was Luis Aguilar, a Democratic commissioner (the other is Elisse Walter) who usually sides with Schapiro. Aguilar, a former general counsel of Invesco, one of the country’s major sponsors of money-market funds, met 11 times with industry lobbyists this year. Among his concerns was that additional rules might lead investors to funnel cash into shadowy, unregulated funds.

This incidentally is a claim of the Investment Company Institute, a mutual-fund lobbying group, which never offered persuasive evidence to back up the assertion. Enough had already been done, the ICI argued, citing modest changes made in 2010 requiring the funds to hold investments that could be quickly converted into cash.

Blow Ups

Quite to the contrary. Money-market funds are almost as liable to blow up today as in 2008, when an investor run on the funds sent the financial crisis into overdrive.

A quick reminder of the dangers: In September 2008, the Reserve Primary Fund held $785 million in Lehman Brothers Holdings Inc. debt. When Lehman failed, the fund suffered losses.

If money-market funds operated like normal mutual funds, the loss would have been reflected in the share price. Investors could consider the stock price relative to other funds or even other investments. But money-market funds promise that share prices will never deviate from $1, ensuring that investors get a dollar back for every dollar invested.

Once Lehman collapsed, Reserve Primary’s assets were worth less than $1 a share, an event known as breaking the buck. Investors fled, hoping to get their money out, fearing there wouldn’t be enough assets in the fund to cover their withdrawals



Oh and surprise

"Who was the biggest buyer of U.S. commercial real estate in the past 12 months?

It wasn't a big private equity firm or luxury developer. Rather, it was the estate of Lehman Brothers, which is still making deals nearly four years after its demise. In the past year, it paid $3 billion to take over Archstone from its creditors, and it is now preparing to take the firm public."


The Ghost Of Lehman Brothers Still Haunts Real Estate Investors




philipat's picture

SEC-regulated or unregulated? Would someone please explain the difference under the present SEC which is too busy watching porn to actually do anything anyway.

Perhaps the real reason is that the TBTF Banks need new funds to "Hypothecate" in the absence of any market volume.

Comay Mierda's picture


the system is starting to show cracks.  must fill them with retail money market cash!

also, if you really wanna laugh, listen to NPR and Bloomberg reports on these proposals and how they will make investing SAFER for moms and pops

you cant make this shit up

LetThemEatRand's picture

"While such concerns are often expressed in connection with any regulatory action and can veer into hyperbole, this is different..."


And even the good guy is kissing their asses.  He obviously knows from experience that ANY attempt to reign in the regulated -- by the regulators -- is met with violent resistance, and he must explain it away by saying in effect, "but this time, we really need to actually do our jobs."  I'm glad he did his job, but the entire structure behind it is beyond pathetic.

blunderdog's picture

Fuck it.  Encouraging movement of funds into unregulated markets is entrepeneurial value for the next generation of Bernie Madoffs.

Theft and fraud are hugely profitable.  Where's GDP growth supposed to come from if they keep interfering with the market's production of financial crime?

AldousHuxley's picture

toobad in 401k you don't have shorting


money market is safety bet in retirement funds


but outside of 401k, shorting provides hedge against long positions.

fonzannoon's picture

money is leaving mutual funds but that does not mean it is not piling in to individual stocks and equities

Daily Bail's picture

True, but I have my doubts that it's going anywhere except into bond funds and maybe dividend stocks.  It's the great yield stampede of my lifetime.  I've never seen anything like it in my 23 years working in the markets.

fonzannoon's picture

i only go by the people i speak to but they are all in div stocks. just another bubble to be popped.

WeAreJellyfish's picture

All those years "in the markets"? What the fuck are you talking about? You work/worked at a fucking casino. Markets are where you buy real shit. The grocery store, the mall and farmers markets are markets shit head.

You fucks buy and sell irredeemable promises and call it a living (the idea Wall Street is a market is like calling President Obushma real)


You are no different than the vampire squids - you just suck crill instead of big fish.

Most here define hypocrite:


Dr. Engali's picture

It's going bond fund portfolios. Not too many people have faith in this market.

fonzannoon's picture

its been going everywhere. stock etf's variable annuities and most certainly bond funds

Dr. Engali's picture

The people going into variable annuities right now are going to regret it. The living benefits are awful and the fees are so high you will never out perform the living benefit. So you might as well say the benefit is what they will get. Most of them average about 3.75% in fees. So if you have a living benefit of 7% you need an 11% return to outperform the benefit. To make matters worse the fees are based of the benefit. So if the living benefit grows to lets say $200,000 and the contract value is $100,000 then the benefit fees are based off of the $200,000. It's a guarranteed win for the insurance companies.

fonzannoon's picture

yeah agreed and it's crazy to think there are proposals out there by poloticians to have 401k money moved into these vehicles. 

holdbuysell's picture

Bollinger for Aguilar!

AUD's picture

out of a liquid but very much inert from the fractional reserve banking system

Are you claiming that because money market funds are supposedly liquid, they are not fractionally reserved?

Tyler Durden's picture

The claim is that due to the far shorter collateral chains embedded within MMFs (here more from Kyle Bass), they are virtually inert when compared to such rehypothecatable instruments as stocks and bonds. Also, it is not our claim: this is the understanding of the Group of 30 (read the attached pdf), who have been set on shifting capital held in MMFs into traditional instruments thus in essence getting a zero cost basis $2.6 trillion in conventional securities demand, ever since the GFC (and largely succeeding but far slower than they had hoped: see charts here and here).

Recall MMFs are part of shadow banking which as we report each quarter is imploding, and since it is deposit-free, it is also "inflation inert" - there is no danger, which to the TBTFs is really the opportunity, of inflation if and when the deposits backing these "assets" were to rush out into the system.

The short hand of thinking about the big behind the scenes transition in money is that the Group of 30, Fed, Treasury, etc, are all focused on rotating as much credit money out of the shadow banking system and into conventional liabilities, which by implication will mean far lower inflationary tolerance - just as Bernanke wants it: as we pointed out China is limited in further easing due to the massive $14 trillion in deposits it has, 3x greater than the US as a % of GDP which is a persistent inflationary spark threat. As we reported previously, Shadow Bank liabilities are merely the world's largest inflation buffers, and thus the most "hated" instrument to the powers that be who are expressly focused on generating inflation at any and all costs. To do that they will need to eliminate the $15 trillion in shadow banking assets as fast as possible. Of course, the flow model corollary is that the Fed will have to replenish the credit money destruction using conventional liabilities, aka excess reserves. Which is why, at some point, much more QE is coming. It is guaranteed.

LetThemEatRand's picture

The density of information here is so great that I'm afraid light may bend.  Something must be coming.  

fonzannoon's picture

no shit i had to read tylers comment 3 times and i'm still not there yet

LetThemEatRand's picture

I read it 5 times.  I hope Tyler will correct me if I'm wrong, but my read is this:  get out of MMFs, and convert to gold, silver beaches.

fonzannoon's picture

is the idea here that money market funds are considered as part of the shadow banking system? I am lost on that one

LetThemEatRand's picture

Yes, but I think the broader idea is that they need the MMFs to blow loose to increase the velocity of money, which is below Great Depression era lows.  If I understand the message (and I may not), it is that TPTB will make sure that anyone holding cash will regret holding cash if they have anything to say about it.

fonzannoon's picture

the huge positive in all this is bartiroma will finally have to shut the fuck up about all that money on the sidelines

TheSilverJournal's picture

Other than Khan repeatedly saying how the "money markets are safe," this is a Good Video Lesson on Money Markets.


poor fella's picture

I don't think many people hold cash and there is NO money on the sidelines. It's all debt servicing and deveraging (at the Main St. level) and speculation and rushing to assets for anyone with any kind of steady income. EVERY SINGLE thing seems mispriced (except natgas). It's going to be a matter of getting out of whatever explodes first, which will flow into the next 'safety net' good trade, which will then be too expensive, implode, and so on, until what exactly?!?!  It's a game of Musical Chairs where everyone gets a chair but they start exploding one by one. Last person there is lucky.

Bi-flation exists but I don't see how it continues without complete unrest. That's my argument FOR cash (as well as dry powder for any 'can't pass up deals'.)

I'm a big proponent of diversification, but not a normal allocation.

1. Pay down debt

2. Cash

3. Precious metals (although also expensive, history tells us this would be the last bastian of safety)

(finally, a little casino money and preps - gotta have fun)


Back to rereading Tyler's post - after which my thesis is shattered, utterly wrong, and I'll regret opening my mouth!   ;)   damn red pill


pavman's picture

Actually, i've got 64% of my networth in cash right now, aka money on the sidelines (37% in brokerage accounts just accruing the pidly interest).  I know, I'm part of the problem.


But the rub is, before hyperinflation, depression comes.  So my thinking is, we're going to see a major major expunging of the bad debt come this fall (or in the next year), then we'll see this huge push into crazy land.

The idea that gold will skyrocket during a depression is ludicrous, unless, of course, Isreal attacks Iran.  Then all bets are off and gold goes postal and the dollar gets strong/equities weaken.  October, that magical mystery month is coming.  Long run, regardless of a return to a gold standard or a great inflation, gold will go up.  Unless, of course, the lawmakers start becoming honest and they drop all the shenanigans.


But cash is king in a depression, even if everyone is dellusional and thinks we're in recovery.  And our present situation is so reminiscent of the great depression era, its uncanny.  I'm still pissed I didn't pick up Apple when they bottomed out at 24 a number of years ago.  I knew they'd be back. Dammit.

Its funny, with all the euro dog and pony show, people keep forgetting the largest American generation is starting to retire, sucking out investment turning it into savings.  If you read Ropke's Crisis and Cycles, you'll see he asserted that deflation occurs when savings (whether voluntary or forced) exceeds investment.  And here we are, at the edge of a precipe of savings.  That will crush investments.  And it will all come soon to a country near you.  Because we're America and we go big or go home.


The real question is... has all this just been the biggest front-running of the markets in history?

Totentänzerlied's picture

"[...] rotating as much credit money out of the shadow banking system and into conventional liabilities, which by implication will mean far lower inflationary tolerance [...]"

" world's largest inflation buffers"

Shrinking the Shadow Banking System reduces the tolerance for monetary inflation by increasing the velocity of money, first by herding the SBS money elsewhere (traditional deposit accounts and then [Bernanke hopes] equities - my understanding) and then by forcing any newly printed fiat to enter the market (traditional deposits et al) rather than be stashed into the SBS, which will kick velocity in the ass (see quote below).

From the link: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012...

27.7% (roughly $2.63 trillion) of (that particular calculation of) the SBS is MMFs

As for Tyler's second-to-last sentence, I'm not sure, but I think the answer lies here http://www.zerohedge.com/news/verge-historic-inversion-shadow-banking#co... or perhaps, from here, http://www.zerohedge.com/news/verge-historic-inversion-shadow-banking :

"Said inflation buffer, however, is getting smaller and smaller every quarter, and at this rate, shadow banking as a transformational conduit will completely disappear in a few short years, at which point everything will be in the hands of fickle depositors (italics added).


In a few years, when traditional bank liabilities have soared by another $10 trillion (think doubling of the current depositor base), and when shadow banking is essentially non-existent, and when the stock market is still where it is, then, and only then, will all those three-letter economic theories, which on purpose ignore the impact of shadow banking, be finally put to the test. We can only hope that by then the market still has some discounting capacity left in it, and can prevent the kind of final outcome that tens of trillions in deposits shifting from Point A to Point B on a whim will certainly create (italics added). Alas, with encroaching central planning having made discounting virtually meaningless and impossible, we wouldn't be surprised if once again the "capital markets" don't understand what has just happened before it is too late."

*Slow clap from the audience, as one by one the veritable genius of the mind(s) which produced the above is recognized*



That all aside, it is comments and posts such as these that P-R-O-V-E the Tylers are right there with the sharpest fuckin' minds around, period, in completely separate level from 99% of the media and blogosphere.

MarsInScorpio said

"[...] it is this type of deep, highly technical article that sets ZH above the crowd and gives it the credibility those who run the ponzi wish it didn't have [...]"

The whole world needs to be reading this site.

TheSilverJournal's picture

I like this part -

Recall MMFs are part of shadow banking which as we report each quarter is imploding, and since it is deposit-free, it is also "inflation inert" - there is no danger, which to the TBTFs is really the opportunity, of inflation if and when the deposits backing these "assets" were to rush out into the system.

fonzannoon's picture

into the few choices they made available in their system

Omen IV's picture

there will be no liquidity at one point in time - no conversion to cash - they will have manditory conversion  - to long term notes  - at their election and at an interest rate they deem appropriate

MMF will be LT Bond fund

scatterbrains's picture

So if I try game theory on this is he saying, Sorry guys this is too blatant for my taste. If you want your rule change your going to have to crash the markets and have Oblahblah institute an emergency executive order kinda thing? 

Poor Grogman's picture

The people managing the system, are doing what they believe will be best for the system.

This will not be best for the investor, because the investor is seen as ""useful" to the system, so long as he can be manipulated into allowing his wealth to be skimmed.

Any instrument that allow investor funds to remain inert such as gold or MMFs must therefore be discouraged.

AUD's picture

I'll take that as not as fractionally reserved, relative to stocks & bonds. You may be right that MMF's are not 'inflationary' in the conventional sense, but that's defining inflation pretty narrowly. Doug Noland had a good article on that a while back. The premise was that inflation is not just rising commodity prices, in fact it commodity prices can be falling but some sector of the credit markets will be ballooning.

DrunkenPleb's picture

at some point

That point won't be before they've shattered the confidence of anyone who might consider hopping on a certain shiny yellow bandwagon. Expect them to keep the QE carrot dangling while they get shadow banking liabilities down to a manageable level, and a few more 'head fake' jumps in PM prices... such as we are seeing this week.

max2205's picture

What about sweep accounts. And Ira $ parked in MMKTS

These people are crooks

Can we get a post to the real proposal

buzzsaw99's picture

"they" are doing "their" damnedest to drive everyone out of every single market.

i live for the day i can get every last dime out of "their" reach.

Never One Roach's picture

Diabolical is all I can say.

Jlmadyson's picture

Time to cash out.

Cabreado's picture

"Out of ammo" is a real thing, and even the beasts themselves are forced to react in some way.

As Manufactured Truth no longer works, the panic in high places will not present itself in orderly, rational ways.

Don't be in denial, as the rats squirm.


Offthebeach's picture

Push comes to shove they can stage ' A Paulson '. Idling Abrams main battle tanks and Bradley's in Fed Bank cities will mesmerize the diabetic muppets to their fatscreens until Great White Welfare/SS Father gives them ( the Muppets ) their thoughts to process the show and come to the desired mass muppet behavior . Should take but a week of live production drama. Jam the EBT/SS/ATM's Muppet cards for a few days. Then Saddam could return and. 350 million muppets would do a mass head, smiling bobble- fest till their Lazy-Boy'd atrophied necks snap off.

economicfreefall's picture

They're all the same...it's like one giant nasty organism sucking the life out of everything it touches - and almost every poltician, regulator and bankster are part of it.


MrSteve's picture

But I thought orgasisms gave life! ya know what I mean?